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Editorial: More tax hikes on the cards

Taxpayers will no doubt be pleased to have read Finance Minister Nhlanhla Nene’s assurances, in an interview with the Sunday Times, that further tax hikes are not a "foregone conclusion".

But it is, unfortunately, best not to bank on this. Based on trends reflected in last week’s budget, it’s almost impossible to see how further hikes will be avoided in the next three years.

The only question is which taxes will be hiked and by how much. And though Mr Nene’s attempts to be optimistic about the economy and tax collections are to be welcomed, his budget tempered that optimism with a high degree of realism. And he needs to follow that up, sooner rather than later, with clear indications on what he is planning to do with SA’s tax system and why.

Not that Mr Nene was necessarily that optimistic. He told the Sunday Times that the most elegant way of raising revenue was to grow the economy, and emphasised that "we were moderate in our tax increases so that we do not stifle the economy". But finding that balance had been a difficult task, he said.

It must have been, indeed. October’s medium-term budget already showed revenues falling almost R10bn short of the targets set in last February’s budget, because of much lower economic growth. Last week, the minister had to revise his revenue figures down again, by a further R4.7bn — and he now expects a shortfall of as much as R36bn for the next three fiscal years.

He had already made it clear in October that he would implement a "structural" increase in tax revenue to close the gap. In the event, the tax announcements he made last week didn’t prove as radical or as controversial as might have been expected. But they clearly weren’t enough to close a R36bn gap either — not unless economic growth picks up suddenly and unexpectedly in the next year or two.

Even the tax measures announced last week didn’t do as much to close this year’s gap as it might have seemed. A surprise one-percentage-point increase in the personal income tax rate, along with an 80.5c/l increase in the general fuel levy, sin tax hikes and a couple of other measures such as an extra transfer duty served to raise an extra R17bn.

However, on a net basis, taking relief for fiscal drag into account, the additional revenue was no more than R8.2bn. So in effect it was the fuel tax increase, not the income tax changes, that served to deliver the extra revenue.

The minister cannot tap fuel taxes every year, especially if the oil price is going to stabilise or increase. So he will have to find something else next time around. But while there was plenty of tinkering with tax rates in last week’s budget, there was little clue of where the minister really does plan to get the rest of the R36bn. The figures could be less, if the economy does indeed come to the rescue. But it could well be even more than that if the economy disappoints, or the South African Revenue Service’s effectiveness takes a hit from the recent multiple changes in its top leadership — changes which the advisory committee that the minister has appointed may help to explain and to mitigate, but is hardly likely to reverse.

Last week’s tinkering was not without logic, though. On the personal income tax side, the minister effectively redistributed the burden, from less affluent to more affluent households, rather than actually increasing it overall. The increase in the maximum marginal rate for individuals is a "wealth tax" of sorts, but only if you count individuals with annual incomes of R450,000 or more as wealthy. Only those people will pay more; the rest will pay less.

Transfer duty changes were more explicitly a "wealth tax", with redistribution of the burden again to the more affluent who buy homes worth more than R750,000 and an extra tax Maitland estimates could raise transfer duty costs 50% on a R20m house.

Surprisingly, the minister did not emphasise the wealth tax aspects of the increases. But perhaps he is keeping that in reserve for when he hikes the value added tax rate. It seems highly likely he will have to do that some time in the next three years to close the gap. He is clearly waiting for the Davis tax committee to moot the idea and open the debate. But he is no doubt hoping too that the economy will bail him out and take a VAT hike off the table.

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